I. Avoidance of Contract:
Defenses to enforceability: (1) duress; (2) fraud (yea I signed, but they misrepresented);
(3) unconscionability (I didn’t know what it meant); (4) illegality.
A. Defects in the bargaining process
(1) Fraud and the duty to disclose
Morta v. Korea ( claims fraud when insurance co. denies him
He freely entered into a settlement that released all claims
He sought counsel from a lawyer
Rule: fraud requires intentional misrepresentation of fact (or law),
and reasonable detrimental reliance on the misrepresentation.
R §§161- 169 (silence is not always active lying…but sometimes it is
R§161: Silence is an assertion: (a) duty to update or correct
misstatements (R §162 (2) : misrepresentation is material if…) ; (b)
must have good faith under the circumstances; (c) (very rare) duty to
correct for another in a writing; (d) fiduciary duty.
Note: for a 161 (a) need some fraud and some misrepresentation. (fraud
without misrep. may not be actionable if unmaterial b/c judge will dump
it if the facts are trivial)
§163: When a misrepresentation prevents formation of a contract
(must be EXTREME and it is very rare)
§164: when a misrepresentation makes a contract voidable…
Laidlaw v. Organ (111 hogsheads is seized back when vendee is silent as to
the increase in value of hogsheads)
must a vendee communicate to the vendor information exclusively
within his knowledge if it may affect the value of the commodity
rule: generally, no buyer dislcosure in order to create incentives to
have successful contracts.
Viciate: means to nullify as a function of fraud
R §159: A misrepresentation is an assertion that is not in accord with
Remedies for misrepresentation: recission or restitution (damages), can
be either tort or contract claim. (see p. 485) In addition to ordering
recission, a court will generally direct a downpayment to be returned in
light of a restitution.
(2) Unconscionability (UCC §2-302…in order to prevent oppression and
Cutler Corp. v. Latshaw (contract calls for confession in boilerplate
Principles of unconscionability: (1) default rule of not looking into
consideration can sometimes go too far (if print is too small or the
language is hidden, law can say no); (2) this puts pressure on future
contracts to insure that provisions are explained or initialed or they
tell you to go see an attorney before signing; (3) this terms effect was
so drastic that they should’ve been more telling (NO CAVEAT
Rule: where an important clause is in fine print and buried
within the body of the form contract, it is unconscionable.
(procedural and substantive unconscionability)
Williams v. Walker Thomas
Highest court says unconscionable: (1) circumstances in which she
signed it; (2) inequality of the bargaining power; (3) her personal
Procedural: was there a meaningful choice
Substantive: the term should be minimally fair (must be an objective
standard: whether or not the term, as it applies, is unconscionable).
Procedural: (1) exploitation; (2) education; (3) opportunity to read it;
(4) NOT THAT POOR PEOPLE CAN’T CONTRACT. Court
establishes minimum decency before a tough term operates in a
tough fashion (dragnet clause). Any inequality is not
forbidden…just need meaningful assent opportunity.
Here, the dragnet clause has a high procedural unconscionability (not
even lawyers understand how it works)
Substantive: goes to what the term says to the fairness of the
You don’t need to have both P & S…but you want at least S (no S,
nothing really unfair). You want at least S to go into court. (they are
mutually exclusive…you want to have both to have a good case)
Court didn’t find the dragnet clause unconscionable, they found the
process and delivery of the clause unconscionable (they way it
operated in the circumstances)
Jones v. Star Credit (§2-302 refrigerator case)
Court will extend, in rare cases, unconscionability to the price term.
Substantive unconsionability is the hook here…is this b/c of the
percentage (should it apply to pencils, erasers?)
UCC doesn’t define unconscionability b/c courts have roving power
to enforce unconscionability (see comments under 2-302: “in light of
commercial circumstances at the time K was made…”)
§2-302 is an opportunity for judges to just do justice
***see 1/28 for §2-202 hypos***
Difference between commercial and consumer, there is a presumption by
the court of equality of bargaining power…tougher to show procedural
Weaver v. American Oil (indemnification clause is signed by gas-
attendant, indemnifying American Co. for their negligence in setting him
American Co. seeks a declaratory judgment to impose liability on the
gas attendant after American employees spray him with fire
Court finds unconscionability: (1) unequal bargaining power; (2)
BIG PROCEDURAL (the clause was never explained to him and he
only had a high school degree); (3) the actual clause was
Zapatha v. Dairy Mart, Inc. (dairy mart franchise owner seeks
unconscionable termination of his franchise agreement)
Court finds NO unconscionability: (1) equal bargaining position (he
had a year of college and business courses; (2) he was told to consult
an attorney and refuses; (3) he was given a chance to work with the
company; (4) company went extra mile to explain everything to him
Court finds no P or no S
Court here applies UCC by analogy and Restatements
R§208…(2-302 (1) counterpart) “unconscionability”
R §205…(1-103 counterpart) “good faith requirement”
B. Illegality: Unenforceable on grounds of public policy
Illegality does not equal criminal…these are the types of things courts do not
want to enforce. R§178…unconscionability on the grounds of public policy. If no
clear legislative action, court applies balance: if interest in enforcement is clearly
outweighed in the circumstances by the public policy against such terms. Hypo:
robber sues to enforce his cut of the bank robbery. Court won’t enforce b/c this would
create incentives to go out and perform illegal behavior.
Examples of illegality:
(1) restraint of trade (e.g. no compete clause…even if you’re fired, you
won’t work for a competing business)
(2) contracts requiring performing of a tort (e.g., $500 to beat up Jimmy)
(3) contracts impairing family relationships in a bad way (e.g. $500 no
to marry Jimmy)
(4) contracts that, while not illegal, contravene a public morality (e.g.
$500 to you to spank my child)
(5) commercial bribes (e.g, agent pays producer $1 mill to contract with
a particular actor)
(6) criminal contracts (e.g, prostitution)
(7) contract against public policy (e.g., baby M case)
II. Performance of the Contract
A. Determining the scope and content of Obligation
(1) Integrated Writings and Parol Evidence (UCC §2-202…introduction of
parole evidence in contradicting or explaining an agreement)
Finality (reached agreement on the terms) & Completeness ( the total
agreement package, no more terms to discuss). YOU MUST HAVE FINALITY
TO HAVE COMPLETENESS! (see matrix) Note: later agreements can always
be introduced (POLICY: lets people change their minds by later agreements)
Usage and trade important especially in defining trade-specific terms, b/c
what it means is important. CAVEAT…parties can agree and contract around to
indicate usage of trade does not apply.
Consistent additional terms: if the term you want to include would surely
apply (or should’ve been included) the court will exclude it. Note: Consistent
means anything that is not blatently inconsistent.
POLICY: parole evidence reduces the invitation to fraud by strengthening
the power of the written agreement. Written agreements aren’t the contract, but
simply the best evidence of the contract. Not just about evidence, parole
evidence is never waived like other evidence rules…it is substantive law!
R§209-213 (w/o 211)…different language but same process. The more complete
the less likely the terms will be let in, especially as they become more likely to
“should’ve been included” in the first place! §213 (2-202 equivalent)
***HYPOS: SEE §2-202 PROBLEMS***
Mitchill v. Lath (contract to buy house subject to removal of the nasty ice
house that never gets removed)
3 part test for introduction of an oral agreement: (1) collateral
(question is: is it related enough to the contract for the court to
consider that it was part of the agreement); (2) must not contradict an
express or implied term in the written contract; (3) must not be a
term that the parties would’ve ordinarily included in the contract.
Merger clauses in contracts can curb this problem…BUT: can still
introduce evidence to explain or supplement, just not additional
Note: there is no dispute between the parties that the term was stated.
JONES NOTE: If you contract in a rural area and you shook hands
with someone to remove the ice house, would you expect this type of
community to have put it in writing???
Masterson v. Sine (dispute over the option to buy-back property given to
Term is introduced that never existed.
CA opts for the more liberal rule of parole evidence…anything is
admissible so long as it won’t mislead the fact finder! (supposed to
remove the problems in the strict rule with failing to allow oral evidence
as to intent whenever there is the presence of a written agreement (in its
Traynor here, wants to allow evidence of the oral agreement to go to
intent of the Mastersons… w/o liberal rule, there could be no
introduction since there was a written agreement.
Note: the husband here didn’t want his wife to get the property…he
wanted his sister to keep the property! On remand, you would have both
parties arguing that he had the exclusive right to buy-back the property.
Problem with circular reasoning: prior oral agreement that must be
excluded if completely integrated, but to determine this turns on whether
there is evidence of a prior oral agreement.
The court looks to the problem evidence to see if it is excluded (The
Alaska Northern Develop. v. Alyeska Pipeline (contract subject to
Intent to contract had to be approved by the committee of Alyeska. The
price term was left blank, so the manager filled in the blank and the
board rejected the contract.
Summary judgment granted for Alyeska
Evidence that contradicts an integrated contract term is not
admissible to aid in the interpretation of that term (“subject to
approval clause”). It will be excluded if the court determines that the
term should’ve been included in the writing in the first place.
should’ve known that the whole contract was subject to the review of
Partial integration: only some terms are done but all the terms aren’t in
3 part test: (1) whether the writing was integrated with respect to the
terms (if yes, excluded; if not, it may be introduced); (2) does the
evidence contradicts or is inconsistent (if contradicts then its
excluded; if not, then it may be allowed; (3) if the term is necessarily
one that should’ve been included in the contract (if so, excluded; if
not, it may be allowed)
2 tests to determine inconsistent:
(1) Hunt Foods v. Doliner : must contradict or negate a term of the
(2) .Synder: the absence of reasonable harmony in light of the language
and objectives of the contract. (more broad)
permeable barrier around a written contract, very few parole evidence
allowances…how does the court decide? (a) looks at the credibility of
the evidence one party is trying to exclude; (b) court then needs evidence
on parole evidence to see if it should allow the evidence.
Luther Williams Jr. v. Johnson (financing for house is central theme at
integrated clause…parties agree that no extrinsic evidence would be
this case blends with unconscionability
the clause here is so ambiguous that it struck the court as failing to
indicate the objective intent of the parties
parole evidence does not bar evidence of an oral agreement as a
condition precedent to final written agreement.
Purpose of parole evidence is to protect valid written agreements…BUT,
if one party wants to introduce evidence of prior oral precedent to valid
This section focuses not on the valid presence of a contract, but what do
the words mean. The purpose of contracts is to protect the expectation
interests of parties…what happens when these expectations differ in
meaning? Words have no intrinsic meaning. Ambiguity arises out of (1)
terms; and (2) syntax (poor unclear punctuation or omitted words). There is
also common language problems ( light can mean weight or to shine!).
Vagueness is unspecific terms (dog…what kinds). Ambiguity is a
combination of vagueness, and the two kinds of ambiguity (terms & syntax).
2 approaches: (1) objective (supported by Williston and 1st Rest.: what
would the reasonable person believe). Problem: you can get over
paternalistic (doesn’t accommodate terms in a particular industry; court could
also tell parties they meant X when they say they meant Y; (2) subjective
(modern trend…supported by Corbin and R§201 is to look at what the
parties themselves intended and the expectations of the parties behaviorally.
Positives: it is truer to the intent of the parties and their behavior. Problems:
not easy to determine, and expensive to have evidence introduced AND
relies on fact-finder determination. Note: If the court can find the
subjective intent, they will apply the objective intent!
Pacific Gas v. G.W. Thomas (contest over the meaning of words)
Steam turbine repair
If UCC: Course of dealing (the relationship between these 2 parties
in prior contracts), course of performance (how these 2 behaved
previously under this contract), usage of trade ( what others in the
If these conflict…court wants to honor the parties expectations:
course of performance comes before course of dealing, comes
before usage of trade.
This is a dispute over the meaning of the terms.
Question for the court: when unambiguous language on its face
appears, should you hear parole evidence at all when it seems plain?
Liberal view of parole evidence…context and language
susceptibility (is it susceptible to the interpretation of the parties); if
the language is particularly susceptible, then the judge will hear it!
Kemp Fisheries v. Castle & Cooke (recovery of damages from the broken
freezer in the chartered boat)
Suit in admiralty so UCC doesn’t apply…
the court refuses to allow introduction of extrinsic evidence b/c the plain
meaning of the language in the contract is clear
the test of admissibility of extrinsic evidence is whether it is relevant
to prove a meaning to which the contract language is reasonably
susceptible. (here the language is clear)
the language of the contract provides that Bumble Bee maintain “good”
quality of the vessel, not seaworthy.
Courts often charge sophisticated parties with needing to read the
Bar is raised for sophisticated parties
Here, the language seems clear on its face, so it denies parole evidence,
unlike Pacific Gas, which hears the evidence despite the plain language.
THERE IS NO CLEAR MODERN TREND…SUBJECT TO THE
INTERPRETATION OF DIFFERENT COURTS!
Difference between interpretation (meaning; Pacific Gas& Kemp)
and scope (terms/parole evidence; Mitchill v. Lath & Masterson)
HYPO (The engagement ring)
A contract is a promise for the breach of which the law provides a
Courts generally won’t get involved in intimate family
Court generally will protect the expectation interests of the non-
Frigaliment Importing v. BNS (chicken case…what is a chicken?)
ordered chicken (intending frying chicken) sold chicken (stewing
party who seeks to interpret the terms of the contract narrower than
their plain use, bears the burden to so show. If that party fails, it
Was their a meeting of the minds b/c their definitions differed so much?
J. Friendly later concluded this was a wrong decision for this reason
Factors a court will turn to for determination of language: maxims,
customs, newcomers to the trade, what the parties said, dictionary, usage
of trade, etc.
Gray v. Zurich ( being sued for assault and insurance company refuses to
defend him b/c it was an intentional act)
Insurance contracts are essentially adhesion contracts between parties of
unequal bargaining power…contracts of adhesion are sophisticated and
tough (these go against the drafter)
Courts will generally view ambiguities in favor of the non-drafter of
POLICY: (1) encourages the drafter to be less ambiguous; (2)
discourages bad faith and hiding of the ball.
R §201 (1) “subjective standard”; (2) if I knew you were operating
under a misinterpretation then you prevail, b/c I should’ve told you!
R §202 (1) circumstances and intent are given great
weight…MEANING (looks to the meaning attached based on the
circumstances) “Whereas X, and whereas Y…” signal courts to
R §203 (b) a sequence of preferences: express terms > course of
performance > course of dealing > usage of trade
B. Allocation of risks
Conditions and warranties help to shift the risk onto another party. Courts
generally enforce conditions and warranties to which parties agree (POLICY: preserve
the bargained for exchange…CAVEAT EMPTOR). Conditions: (1) express; (2)
constructive. Things that ensure one parties obligations to perform don’t arise until a
condition is satisfied (I’ll paint the house, but on the condition that I need two people to
help me). Warranties (1) express; (2) implied. These create liability for deviations from
what’s warranted in a contract. Condition asks have the obligations ripened or come
alive; Warranties ask whether or not one party is liable for deviations from what was
promised. KEY POINT: conditions protect, warranties attack by assigning liability.
Express condition: obvious in the language. Implied: implied in fact (from the
circumstances). Constructive: implied in law (court finds that it should be there,
(1) Express Conditions: (R §§ 224-229) This tends to involve language
“provided that”, “upon condition that”, “if”, or “subject to”, etc, creating a
presumption of condition. Arises only from contract, are usually pegged to
the event (either within one or neither of the parties control). Courts don’t
inquire into the substantive value. Good faith rules this, but actual
performance won’t ripen until condition is met. Express conditions are in
language and openly obvious.
Implied conditions are interpreted from surrounding behavior.
Excuse to conditions: non-occurrence (may not necessarily discharge the
duty); waiver (a party who normally would be able to get out can’t
necessarily if the party waives…waiver of the condition, or if protected party
breaches); satisfaction; forfeiture (excuse based on economics and equity…in
cases where non-payment rests on tiny imperfections; Jacobs & Young case).
(a) Nature & Effect
Dove v. Rose Acre (sick law student forfeits summer bonus from the egg
A party is bound to perform conditions accepted to under
contract, and performance is not required unless those
conditions are met.
Dove knew the conditions and failed to meet them, despite efforts by
his employer who offered to let him sleep on the couch, or make up
Case is primarily useful as to what is an express condition and how
harshly it can operate
The condition has bite! It was explicit, no fraud, not waived, etc…
Parties can agree on who bares the risks (scope). Courts don’t like forfeiture,
b/c courts don’t like to throw one party out for minor faults. If a condition
has bite, tehn it must be satisfied for the parties performance to ripen. In a
non-satisfaction of a condition: 2 things can happen: (1) suspends the other
party’s obligation; (2) duty may be discharged. Conditions are time
dependent…when does obligation to perform ripen.
Wal-noon v. Hill (repairing of the leaky roof w/o notice to owner)
A lessee’s compliance with a provision requiring him to give notice
of any defects is a condition precedent to the lessor’s performance to
his obligation to perform (he could’ve done it for cheaper, but you
never notified him)
Wal-noon is a circumstance of implied condition…no explicit condition
to give notice before repair, but court says contract is implied in fact
(impossible w/o it)
Jacob & Young v. Kent (case of the wrong pipe, not of reading
House builder sues to get payment despite the wrong (but same quality)
Where the non-satisfaction is grossly disproportionate to the
oppression (what it would take to fix the problem) the breach will
sometimes be considered trivial IF, the non-satisfaction was
Where it is grossly out of balance, owner is entitled to the difference
POLICY: promotes justice when there is substantial performance
with trivial deviation!
Dissent…tows the hard-line and would require replacement of the pipe!
Despite the condition, performance can be substantial enough so the
party still has to pay. Question becomes how much is enough?
If this rule didn’t exist, there would be a windfall for the other party and
the contractor would be over penalized.
In re Carter
Plaintiff agreed to purchase company valued at a certain price, seller
states that there has been no change in financial condition and that
the condition would not be less favorable. After bought the
company, it was less valuable and court treats it as condition
Express condition precedent to a party’s performance to a contract
may not be treated as a warranty
Common difference between conditions and warranties
Here, the condition was waived by accepting the terms of the
(b) Excuse of Conditions
Excuse can be raised (party will argue): (1) no condition at all; (2)
satisfaction of condition. How do we excuse a condition that wasn’t met?
Excused for 2 reasons: (1) waiver by the other party in the form of a later
modification; (2) breach by the other party as in “they prevented me from
satisfying” or “the other party failed in the contract too”. POLICY: Courts
dislike conditions because it puts them in an all or nothing scenario (no condition
met, no contract). BUT, the fact that conditions create forfeiture under the
written contract, doesn’t mean quantum merit or estoppel theories can’t be raised.
Alternative techniques for courts to do equitable justice. Factors that lead a
court to do this instead of giving bite to a condition: (1) utility (95% of a mowed
lawn is a good thing); (2) context (what are the circumstances of the case); (3) is
the enrichment unjust.
Reasons for excuse:
(1) subsequent later agreement to discharge the condition (parole
evidence problem; you can make this explicit…BUT does it require
consideration: UCC §2-209(1) no consideration necessary (same
in Rest.); POLICY: allows parties to change position w/o
consideration, and to allow parties to waive w/.o consideration b/c
they may be business decisions);
(2) waiver implied by conduct;
(3) doctrine of impracticability (the condition can not be done or can not
(4) discharge by the court as a function of substantial performance.
Clark v. West
$6 a page if he abstains from alcohol, he gets paid $2, and he wants
more, arguing that condition was waived. Company argues that
alcohol was consideration (if abstinence is consideration he’s out; if
condition, court could find that it was waived)
2 arguments for : (1) condition was waived; (2) even if not waived,
I wasn't intoxicated for most of the time (equitable estoppel).
Court finds that it was a condition ( it wasn’t a contract to keep him
sober, but a condition to keep him sober for writing good books)
Theory of waiver…if the company was on notice (they knew he was
drinking) & they told him not to worry about the extra $4. (either
waived by saying nothing, or saying something)
Aetna Casualty v. Murphy
terminated lease with Aetna’s insured, and then Murphy damages the
place as he’s moving out. Murphy gets the complaint but doesn’t notify
his insurance company (Chubb) for 3 years.
Murphy’s contract stated that he had to give notice to the insurance
company as soon as was practicable.
If Chubb was hurt by not being noticed earlier, then you can quantify it
(the amount Chubb was hurt would be subtracted from his payment)
HOOK: Chubb says that the condition wasn’t met and so the contract
was discharged. (Subjective test to determine whether or not the
condition was waived)
Non-performance is excusable b/c the court couldn’t find any
prejudice/injury to chubb, and the contract was one of adhesion (court
construes against insurance company giving latitude to Murphy)
There can be satisfaction of a condition and an excuse that can lead to
performance of the contract (court provides protection for the insurance
company, yet allowing the party seeking excuse to prove that the
insurance company was not injured!)
This is an example of flexible excuse rule, as compared to the hard-
line rule in Dove (elaboration of the doctrine of substantial performance
in adhesion contracts…no face to face negotiations as in Dove)
(2) Constructive Conditions of Exchange
R§ 234: order of performance (gap filler). Hypo: $500 to paint a
house. You say money first, I say paint first! Who does what first? Without an
express condition, use default rule of §234. Parties can contract around it, but
gap filler if no specifics. Under (2) if something requires a period of time, it
must be done first.
3 types of conditions: (1) express; (2) implied in fact (circumstances) or
implied in law (courts); (3) constructive. Constructive conditions usually raise
the question of who performs first (order of performance). Contracts are
designed to allow parties to exchange at different times (promise to pay later for
performance now). How substantial must performance be? What happens if
there is a breach? Original contract law: original party’s breach is not an excuse
for your performance (I still have to pay, but then can sue you to get it back).
Today, §234 means one party’s obligation must precede the other unless it is
Jacob & Young
Could construe constructive condition of the installation of reading
pipe here…BUT, court finds close enough for satisfaction!
2 tests for satisfaction: (1) substantial performance; (2) exact
difference between a shield (I don’t have to pay b/c condition not
satisfied) & a sword (I’ll sue you for $ b/c the condition wasn’t
O.W. Grun Roofing
the question centered around the aesthetic value of the color of the
shingles installed by defendant…how much is the loss
does the homeowner’s obligation to pay arise b/c of the substantial
Doctrine of substantial performance: a promisor who has
substantially performed is entitled to recover although he has failed
in some particular to comply with his agreement (very common in
Test for substantial performance: (no general rule, just
guidelines and factors…highly fact specific). Weigh: (1) the
purpose to be served, (2) the desire to be gratified, (3) the excuse
from deviating from the letter of the contract, and (4) the cruelty
of enforcing strict adherence or of compelling the promisee to
receive something less than for which he bargained. Subject to
the contractor acting in good faith (innocent mistake) & not so
essential to the object of the contract.
Theory of quantum meruit (“as much as he deserved”)reasonable
value of services (damages awarded in an amount considered
reasonable to compensate a person who has rendered services in a
quasi-contractual relationship)…this is the basis for diminution in
Court infers the women got no benefit…ugly roof! POLICY: Court
wants to avoid windfall to plaintiff who will just pocket the money
and live with the ugly roof.
Lowy v. United Pacific Insurance Co.
Lowy completes 98% of a grading contract and then quits do to a
A contractor may recover for work actually performed under a
construction contract if he has substantially performed his
contractual duty in good faith.
Court finds a severable contract b/c the consideration was
apportioned in phases… was prevented from completing 2% of the
project when hired another company
acted in a good faith dispute, and substantially performed and
therefore is entitled to payment for his services.
(3) Representations of warranties of quality
Warranty disclaimer and remedy limitations accomplish similar things in
different ways. Warranties concern the topic of duties…what are the scopes of
the duties between buyer and seller? Completely different angle is a remedy
limitation (has nothing to do with the duties). Defines the extent of the remedy
rather than define the extent of the duty under the contract. The law treats them
differently… How you characterize something changes the outcome of the
claim, despite the substantive goals being exactly the same.
Warranties: (1) allocate risk (marketability); (2) unconscionability
(prevents unconscionabiliity in things like door to door sales (if passes 316, a
court may still strike it down under 302). 2 ways to allocate risk: (1) warranty
disclaimer (concerns duties; disclaimer: are obligation is only X not Y); (2)
remedy limitation. (if X doesn’t work, your remedy is to call and we’ll send you
a new one; remedy, not duty!)
313: Express Warranties by Affirmation, Promise, Description, Sample:
ways parties can create warranties by promises, etc.
314: Implied Warranty: Merchantability; Usage of Trade
Warranty of “marketability”(you buy a boat and it doesn’t float, boat
seller can’t say too bad)
Must be a “merchant of goods of that kind”
POLICY: shift the risk to the merchant (move away from caveat emptor)
315: Implied warranty: Fitness for particular purpose
when you have a special or particular purpose, and you rely on the
different from 314…you don’t need to be merchant of goods of that kind.
Must reasonably rely on the person skill and knowledge (objective test)
Burden is on the buyer to show the merchant reasonably knew of his
POLICY: shift risk (move away from caveat emptor)
316: Exclusion or Modification of Warranties
(1) presumption for terms in/and in relation to contract is that they are
consistent…if not, express terms in contract win
one that affords the broader protection governs (similar to adhesion
if seller’s promise is only oral, then you have a parole evidence problem.
lets the buyer decide, says nothing about the content of the disclaimer
(protects procedural aspects) (creates incentives for disclosure)
deals w/ all warranties excluded (express or implied)
POLICY: Protects from unfair surprise (procedural unconscionability)
POLICY: shift the risk (move away from Caveat emptor)
719: Contractual Modification or limitation of remedies
hybrid…addresses warranty and remedy exclusions (should’ve been in
focuses in minimum adequate remedies of substance (substantive
(2) what is essential purpose: you buy a yacht and manufacture
warranty says in case of defect we’ll repair the defective part. If it sinks,
you have no remedy, therefore, warranty failed the essential purpose.
official comments address the same things as 316 (when can you get out
must be some remedy available for the buyer. POLICY: prevent
Henningson v. Bloomfield Motors:
an express warranty that seeks to severely limit the manufacturer’s
liability and that disclaims all other warranties can be void as against
Henningson before UCC…this kind of case gave rise to §2-719 protections
(now you can’t limit or exclude consequential damages in personal injury
from consumer goods).
Shows us the conjunction between §2-302 and warranty.
There was gross inequality of bargaining power
Murray v. Holiday Rambler
Where the remedies in a limited warranty fail to correct a seller’s
breach, the limitations will be disregarded in favor of ordinary UCC
If the remedy fails under §2-719, how long must the consumer wait?
(perhaps reasonable time)
III. PERMISSIBLE REMEDIAL RESPONSES (DAMAGES)
A. Overview of damages: (Sheila Hypo & Damages matrix)
The goal of contract remedies is to protect the expectation interests of the non-breaching
party: PUT THE NON-BREACHING PARTY INTO THE SAME POSITION (NO
BETTER, NO WORSE) AS IF THE CONTRACT HAD BEEN PERFORMED
1. Introduction: Why people keep promises?
(a) utility (why people keep promises): (1) I should keep my promises or
my reputation will be damaged; (2) (retribution) I’ll hurt you if you
hurt me; (3) divine retribution.
(b) Business reasons: costs to defending a breach (money, court, time,
****hypos on 3/24****
2. Efficient breach: Pareto Superior = at least one party (breacher) is better
off and no one (non-breacher) is worse off (society benefits). In most
cases, it is more economically efficient to breach when there is a better
offer, b/c all parties will be better off in the end. (see handout) Note: this
model does not take into account everything (assumes a lot). Tend to
undercompensate for anxiety of breach. Even if you cover, you may get
gray hairs in the process. (doesn’t account for the intangibles)
Bread Hypo: (WHY ENCOURAGE BREACH?) Remote area
has 1 market & sells bread. 1 man in town contracts for the entire load
for art project. Snow storm hits, no food, truck arrives. The need price
increases 10x. If breach is over-deterred, market must give bread to man
and not people. POLICY: sometimes you want breach to more
efficiently distribute resources. Note: this discourages punitives…if
people need bread and penalty for breach is 100K, store might not be
able to afford the breach. Courts are ethically neutral in respect to
commercial breach (legal system doesn’t prevent breach, just redresses
it…law just defines the consequences).
3. Breach: (1) promisor fails without justification to perform when due
(promisee has done his part, but promisor is holding out) REMEDIES:
specific performance or an action for damages
(2) promisee has not yet performed (no one has done anything b/c
promisee hasn’t done his part) Promisee’s duty is discharged (shield)
REMEIDES: damages or specific performance.
4. Repudiation: valid K and promisor by word or conduct materially
repudiates conduct not yet due. HYPO: on Friday you say you’ll clean
my pool and I’ll pay you $500 and on Wed., you say forget it
(performance is not due until Friday) Did you breach? (a) it is a breach;
(b) if the non-breaching party had performed at the time repudiation was
tendered, non-breacher can sue for the contract price or for damages or
5. Special Case scenario: words or conduct in the circumstances create
special doubt about a valid contract performance. HYPO: Contract with
S to put up a wedding tent. 2 days before the wedding you see S packing
his tent up (he hasn’t breached, but you doubt he will perform). What
can you do? (a) suspend performance temporarily (hold up installment
payments); (b) demand adequate assurance that he will perform (if he
doesn’t give it, you can treat it as repudiation).
6. Types of remedies: (start with expectation and then look to others
depending on the facts of the case)
(a) expectation damages (compensatory): put the non-breaching party
back into the same economic position as if the contract had been
performed without breach (default presumption) HYPO: I’ll paint
your house for $500 on Friday. I expect to get my $100 profit!
(b) punitives (exceptions to the default rule) can be assessed in
aggregious bad faith: (1) tortious conduct; (2) fraud. POLICY: just
don’t like fraud and bad faith.
(c) specific performance: when goods are unique, there is a better
opportunity for specific performance, b/c it is harder to calculate the
precise value (there aren’t numerous alternatives…VERY RARE!)
POLICY: $ doesn’t always get you the exact thing!
(d) reliance: designed to attempt to put the non-breaching party in the
position they were before they entered the contract! HYPO: I get
back the $400 worth of paint I bought to paint the house.
(e) restitution: designed to dis-gorge from the breaching party any
benefit the breaching party got from the non-breaching party! (not
focussing on the individual parties’ positions) HYPO: I pay you
$100 to sell X. You don’t sell X, I get the $100 back!
(f) consequential: damages beyond incidental that are foreseeable in
light of the breach
(g) incidental: damages that flow directly from the breach (usually cost
of arranging a substitute)
(h) liquidated (stipulated): contractual term limiting the amount of
damages available in cases of default (determined in advance).Note:
VERY cost-effective method esp. if parties know each other and plan
to continue dealing.
Reliance can be divided into essential and incidental reliance.
Essential are those things that one party absolutely have to do for the
deal to come together (doesn’t mean that they are contracted for).
Incidental are things done unique to that product in reliance upon
the delivery (reliance is not essential to their performance…special
accessories to a particular hot tub). THE closer it is and the more
unique it is to the product, the more incidental it probably is.
Loss in value: what you would have received minus what you
actually received. (K – any installment payments thus far).
Cost avoided: expenses you would’ve had to incur but don’t now
that the other party breached (no longer have to pay someone to
install b/c of a breach)…think of it in terms of expectations or things
you would’ve expected to pay had the contract been performed.
Loss avoided: a term to describe a way of minimizing damages
through resale. (avoid losing the full value of the items by reselling
the items to another party, or reasonably could’ve sold the items but
Incidental and consequential damage…Incidental: directly from
the breach, usually expenses, as a consequence of trying to avoid loss
(costs of arranging a substitute). Consequential: damage beyond
incidental that is foreseeable in light of the breach. (sometimes
charged against the breacher and sometimes not).
Nominal damages: you get damages because you won in principle,
but not a lot ($1 becomes symbolic or nominal).
Expectation damages: put the non-breaching party back into the
same position that they would’ve been in had the breach not occurred
8. Policy objectives:
(a) contracts are about shaping our future and specifying the results
(b) avoidability: could no breacher avoid the loss
(c) certainty: how certain is it that the loss is valid
(d) foreseeability: what if $1 widgets would be used in a $1mill.
Sullivan v. O’Connor (messed up nose)
A physician who breaches K to effect a particular result is liable to
his patient for the cost of any measures or treatment necessitated by
the physician’s breach, and for any pain and suffering resulting
Problem here is with expectation damages (hard to calculate…what
was she expecting to get from her nose? The measure is the
difference between a 2 nose and a 10 nose) Had the contract been
performed she would’ve got a 10.
Reliance: 2-6…before the contract, where would she have been?
She has a perfectly functioning nose…hard to quantify expectation
Restitution is too small (would only be her out-of pocket fees)
Attorney here does a contract and a tort claim (Dr.’s aren’t usually
sued for breaches like this)
Court applies a quasi-reliance measure of damages: Restitution
(focusses on the Dr.’s benefits; his fee); Reliance is the position
she’d be in if no K (get her to the 6 nose & then get her back all of
the fees associated with those costs of all the surgeries); Expectation
she expected 2 surgeries, so she only recovers the pain & suffering
and costs associated with the 3rd (unexpected ) surgery.
Allen v. Jones (K to cremate his brother’s body was botched)
May damages for mental distress be recovered from an action for
breach of K
Damages for mental distress may be recovered for breach of K
which so affects the vital concerns of the individual that severe
mental distress is a foreseeable result of the breach.
F.D. Borkholder (addition to the showroom in furniture store did not prevent
moisture. witholds payment b/c of it)
Punitive damages are recoverable in breach of K only when
accompanied by tortious conduct
Punitives in K are RARE
Boise Dodge v. Clark ( sold supposed new car (he had turned back
odometer). finds out )
Although an award of punitives must be reasonably
proportionate to the amount of actual damages, judge or jury is
entitled to exercise discretion in determining amount.
Ordinarily punitives not awarded, but sometimes in cases of wanton
& malicious breach, or when claim sounds in both tort and K.
Hancock Insurance v. Cohen ( was beneficiary of life ins. policy (monthly
paymnets for 20 yrs.). After 15, stopped payments claiming policy issued for
20 yrs. by mistake.)
Doctrine of anticipatory breach is inapplicable to a suit to
enforce K’s for future payment of money only, in installments or
Future payments do not have to be made until they are due…no lump
American Mechanical (’s repudiation of K to purchase real estate & machinery
led to foreclosure of ’s property)
Breach of real estate purchase K an injured party is entitled to
recover his actual losses when traditional recovery formula is
Here, the court determines this loss was foreseeable to ( still has
a duty to mitigate
New Era Homes (under K to remodel ’s home, was paid money at certain
stages. When refused to make 3rd payment sues)
The inclusion of a provision in a construction K for partial
payments to be made as the work progresses does not generally
render K divisible, unless it is clear from K terms that each
progress payment is intended to be so apportioned to the
corresponding portion of the work as to be the full consideration
for that portion of work
No sign K intended to be divisible, so the application of quantum
meruit or another theory is used
Bernstein v. Nemeyer (Bernstein sought to rescind agreement w/ after
breached his negative cash flow guarantee leading to the loss of the entire
An injured party is not entitled to a restitutionary remedy where
the breaching party has not been enriched and cannot be put
back in the position he would have been before K.
Locks v. Wade (jukebox case)
Where a lessee defaults on an agreement to lease an article the
supply of which is not limited the lessor is not required to reduce
his damages by the amount he actually did, or reasonably could,
realize on a re-leasing of the article
Reliance Corp v. Treat ( co-op K’d to buy barrel staves from Treat. Price rises
during the 4 months between K and delivery, did not perform)
Whether a seller breaches a K by giving the buyer notice of
renunciation or simply fails to perform the damages awarded the
buyer shall be measured as the difference between K price and
the market price on the date delivery was due.
(UCC changed this rule §2-713) while the measure is still market
price – K price, it is applied to the day notice of breach was made
rather than to the day of delivery.
Rivers v. Deane (addition to home was constructed in such a faulty manner as to
render it unusable)
in the case of faulty construction, the proper measure of damages
is the market value of cost to repair the faulty construction.
CTC awarded b/c it was so material (so bad)
American Standard ( contended measure was DIV not CTC for grading of ’s
land, American standard)
Only where the cost of completing K would entail unreasonable
economic waste will the measure of damages for breach of
construction K be DIV of the property in relation to what its
value would’ve been if performance was completed properly.
Court says no economic waste despite the fact that market price was
virtually unchanged through resale.
10. When to shift from one type of damages to another
Start with the idea of expectation damages (b/c of the notion of
Move away from this when problems arise:
The expectation damages become difficult to calculate (Sullivan how
much would the nose have been worth had the surgery been
Look to restitution (seems way too little…)
Look to reliance (seems way too much…)
11. Losing contracts occur when: (1) somebody just misjudges how much it
will cost them to complete; (2) somebody intentionally enters into a
losing K in order to resale higher later
Suppose a builder would have to pay $2 million to be entitled to $1
million payment. Suppose the landowner then breaches…would you
then have to charge the non-breacher b/c they would’ve lost money
anyway? No expectation (he expected to lose (note: no restitution
measure either b/c that would require the breacher to pay more for
breach than if non-breach)
pro rata [KEYHOE] approach (relatively rare): calculating the % of
building completed and giving the non-breacher the % applied to the
contract price; sometimes the restitution is capped at the price of the
contract). **This only works when the contract can be easily
HYPO: Piper has K w/ city to lay 10 miles of pipe for $1mill. He
lays half the pipe (cost him $800, 000: Losing K). Suppose the city
scraps the contract.
Restitution…Piper gets $0 b/c there is half a sewer to nowhere.
Expectation is out b/c it is a losing contract.
Reliance…is it fair the city should pay more than half b/c you
KEYHOE…give you the portion of K price = to the amount
12. Lost volume sellers: Suppose there is a contract to sell X. The price is
$100. Suppose the buyer breaches…Suppose the seller then walks
across the street and sells the bike to someone else for $100. Can you
tell what the expectation damages are? It depends on the number of X’s
that the seller has…If there is only 1 X, then the seller is no worse off.
BUT…if there are 100 X’s, then the seller could’ve sold another bike
anyway to the second buyer. (he would’ve profited from 2 separate
sales) LAW WANTS YOU TO FIND OTHER BUYERS!
Note: Selling the same good to another buyer for the same price does
not make you equally well off. WHAT you get back under these
circumstances is profit + (in some cases) incidental damages.
LOST VOLUME SELLER
The more unique and finite the item you sell, the less likely you are a
lost volume seller. The more you generate to increase output to meet
demand, the more you can argue for the lost volume seller.
Remember…you are still trying to put the non-breacher back into the
same position as if there had been no breach! (Juke-box case is a
13. Seller’s Remedies
R §347 doesn’t distinguish between buyers and sellers…UCC
UCC §§2-703 – 710…(see index)
Slick Shoe Problem on p. 870
14. Buyer’s Remedies
R §347 doesn’t distinguish between buyers and sellers.
UCC §§2-711 – 716…(see index)
§2-501 is the definition of identified
15. Cost to Complete (CTC) v. Diminution in Value (DIV)
Usually arises in the service context
CTC – Put the parties back to the same position as if the contract had
been performed (cost to complete performance)
DIV – (Jacob & Young) If you were to put the non-breaching party
into the position had the contract been performed, this would create
economic waste in cases of minor, innocent deviations. POLICY:
protect the innocent breach.
Factors courts use to determine which test: (1) substantiality; (2)
intentionality; (3) cost of each test; (4) the more substantial the
performance the more you go to DIV.
CTC may create a windfall for the parties. (J&Y, should the law care
if they take the $ and go on a cruise)
Value increase in completion… (grading of the mound)
B. Non-breacher’s defenses: (focus switches to how can defend against
1. avoidability: POLICY: we don’t parties to sit around out of spite and
allow damages to run up. R §350. Duty to mitigate (cover): POLICY:
we don’t want people to sit on their hands and allow damages to build up
2. Foreseeability: (Hadley) reasonable considered to arise naturally
(ordinary course of events; or in reasonable contemplation at time of K)
and special circumstances…if neither party knows then damages will
be capped by what a reasonable person would foresee in this
contract setting. However, if the special circumstances are known,
then foreseeability is expanded. UCC & Restatement move us from
what was communicated to what is reasonably likely (from subjective to
objective). Parties can contract around foreseeability if there is low or no
procedural unconscionability. (Fed. Express air bill example)
POLICY: we don’t want to bring businesses to their knees by
assigning all damages to breachers, this would lead potential breachers
to have cover future loses and insurance costs (driving the price).
POLCY: efficient breach gives societal benefit. We don’t want
to over-deter potential efficient breachers (have to give them an idea of
how much will be assessed against them). Foreseeability encourages
POLICY: encourages breachers to inform themselves of the
circumstances to prevent willful blindness (UCC §2-715(2)(a); R §351)
3. Certainty: R §352… (Hydraform) How do foreseeability and certainty
differ? Certainty refers to the quantifiability (measuring damages that
occurred) of the damages, not the arising of the damages. Certainty has
nothing to do with whether a breach will lead to damages, it is a
satisfaction of the fact-finder test, goes to what you claim now!
4. Hydraform (stove case)
entered K with for steel to make stoves. Delivery receipt signed
by ’s agents disclaimed liability for consequential damages. Some
steel was late. If steel for 400 stoves was ordered, would stockpile
steel in advance (delivery still late, etc.) attempted to cover
(obtain elsewhere), but could not. sold stove division for $150K
after only selling 250 stoves. filed suit for breach claiming $100K
lost profit, $220K for the loss on the sale of the business. Jury
awarded consequentials of $80K & appealed.
Consequentials must be reasonably foreseeable, certain, and
Seller must know of the general or particular requirements of the
buyer to be bound by foreseeability.
Damages sought must be reasonable consequences of the breach
Consequentials may only be recovered if they could not be prevented
by cover or otherwise.
There was no certainty of future profits b/c the company was too
new. DIV was based on future profits not ascertainable.
Jury should’ve only calculated the loss in profits between the 400 (in
K) and the 250 (sold).
5. Hadley (mill case)
was not aware of the mill’s closure and damages that might result
test for foreseeability
brings up issues of fairness and objective reasonableness. “Arising
Naturally” refer to foreseeability…it is very ad hoc and fact specific.
Key to the case…if neither knows, the damages are capped by what a
reasonable person would think…BUT, if one explains the special
circumstances, then you have notice and may be held to them.
Spang agreed to supply steel to (torrington) for use in
Delays in delivery resulted in inconvenience and extra work for ’s
employees (it got cold and they couldn’t complete the bridge)
A party who breaches K may be held liable for all damages
which could reasonably have been anticipated at the time the
agreement was entered into.
Explains Hadley: Although Spang did not know, this was arising
naturally from your delays
7. POTENTIAL PROBLEM SPOTS IN DAMAGES:
UCC has a statute of limitation for damages of 4 years (§2-705(1).
Non-UCC common law, each state has its own.
Liquidated or stipulated damages… appropriate damages agreed
to by the parties ahead of time. Can be a very cost effective way of
dealing with parties…BUT, this measure of damages is subject to
superceding policy concerns: unenforceability by the courts due to
unconscionability, or disproportionate windfall. (otherwise, this
would allow parties to contract around the social benefit of efficient
Courts draw a distinction between penalties and bonuses… Dove v.
Roseacre…suppose the contract had been re-written merely to give
him a bonus. (distinction between penalties and bonuses is minute in
real life, but courts draw the distinction despite the same economic
effect). HYPO: we’ll pay you 10K unless you don’t bill more than
200 hours…or, we’ll pay you 10K if you bill more than 200 hours.
(one’s a penalty, one’s not…courts disfavor penalties)
UCC §2-718 Liquidated damages…amount void if too high!
(creates incentives for parties to be reasonable) “OR” is a hard
or…one or the other (post hoc, or ad hoc) anticipated OR actual
harm caused by the breach. (either one can provide an avenue for
stipulated damages to pass muster under (1)) The more specific the
penalty (2-718) is, the more likely someone who has met that
standard, the more likely they will be immunized from other
statutory weapons (Safe Harbor)
Seller’s don’t get consequentials b/c money use is not foreseeable
(money is fungible (§1-201(17)) in a way widgets aren’t)
8. TRIVERS HYPO